Is the Price of Gold Rigged?

I am a believer in purchasing gold bullion. However, I have no illusions: gold is not money, at least not nowadays. Dollars are money. Digits on a computer in the banking system are money. But gold beats inflation. In the modern day, all major governments are inflationary.

The gold market is poorly understood by the general public. This is because the general public has had very little interaction with gold since the introduction of the Federal Reserve in the early 1900s. Precious metals are often met with a great deal of skepticism and suspicion by the general public.

Fervent supporters of precious metals often do not help their own difficult ideological position. Many “gold bugs” (as they are pejoratively called) have a tendency to make outlandish claims regarding the current price of gold. When the price of gold surges, they proclaim that it is because the collapse of the dollar is at hand. When their predictions turn out to be wrong and the price of gold falls, they claim that illicit “manipulation” by some shadowy organization is responsible.

One such man is Paul Craig Roberts. In a recent article, Dr. Roberts lays out his theory of gold price-manipulation by the Federal Reserve:

“Fractional reserve [banking] systems break down when too many depositors or holders of paper claims present them for delivery. Breakdown is occurring in the Fed’s fractional bullion operation. In the last few years the Asian markets–specifically and especially the Chinese–are demanding actual physical delivery of the bullion they buy. This has created a sense of urgency among the Fed, Treasury and the bullion banks to utilize any means possible to flush out as many weak holders of gold as possible with orchestrated price declines in order to acquire physical gold that can be delivered to Asian buyers.

“The $650 decline in the price of gold since it hit $1900 in September 2011 is the result of a manipulative effort designed both to protect the dollar from Quantitative Easing and to free up enough gold to satisfy Asian demands for delivery of gold purchases.”

According to Dr. Roberts, the Federal Reserve is manipulating the price of gold downwards to cushion the dollar against inflation and to satisfy Asian banks who are demanding redemption for dollars in gold.

How? Show me the evidence. I want evidence and a clear, systematic, step-by-step explanation of how exactly they achieve this.

“Supply and demand” is the only thing from economics class that most non-econ college students remember after graduation. It is the fundamental rule of all economic analysis. Supply and demand control the market. Gold fell from $1700 to $1200 in the span of one year.

Dr. Roberts is saying that this was the result of manipulation. For the entire year of 2013, the Federal Reserve supposedly controlled the market instead of supply and demand, in spite of all outside influences? In spite of all the international developments in the gold market not under Federal Reserve influence? I don’t buy that for a minute

It is conceivably possible to manipulate the gold market in the short term, through the futures market. Selling short might be able to scare the market out of gold for a short period of time, but the market will rebound quickly. Wait too long in a short position, and you might lose everything plus a little bit more.

For this to work, how much gold would the Federal Reserve have to sell? They would have to sell a huge amount of gold. You or I could never do this. Any gold we might own ain’t nuthin but a thang. Besides the Federal Reserve, only investment banks, hedge funds, and super-rich investors could attempt this.

Problem: I don’t think the Federal Reserve has any gold to offer. I think they have gold in the vaults, but all of this gold is legally owned by other Central banks. They have been selling it off for years. I do not think the Federal Reserve directly owns any appreciable amounts of gold that it is legally allowed to sell. My evidence? The Federal Reserve has never, in the modern era, allowed a full audit of its gold. The U.S. government has supported their position in not allowing an audit. Nobody really knows how much gold the Federal Reserve has, because they will not allow anyone to make an audit. Why keep this hidden? If the gold is there, what do they have to hide?

One year ago, Germany demanded a return of its owned gold from the vaults at the Federal Reserve.  The Federal Reserve will not immediately comply. They said they would deliver over the course of seven years. I think I know why: they can’t comply right away, because they don’t legally own enough gold.

So, to say that the Federal Reserve is driving down the price of gold is to say that they sold large amounts of gold for 3 years straight. Did they? Where did they get the gold, if that’s the case? There is no evidence that this occurred. There is no trace of them receiving large amounts of gold, and neither is there a trace of the Fed selling large amounts. There is no proof.

Furthermore, such a theory does not make sense to me. China and India’s central banks buy huge amounts of gold all the time. If the Federal Reserve was selling huge amounts of gold, why did the price crash, when the Chinese and Indian central banks would have more than likely bought up the new supply? The price may have decreased, but not crashed. This was not the case.

I am a firm supporter and believer of investing in gold, but I don’t kid myself: the general public does not share my position. The price crashed from 2011 to 2013 because demand fell. The public was not looking for gold. Contrary to popular “gold bug” opinion, gold is not money; dollars are money. Investors wanted dollars over gold, and that’s the explanation. If they want me to believe that the Federal Reserve manipulates gold prices, I need more than just circumstances and a motive. I need proof.

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